Want to buy stocks like a master investor? Well, Peter Lynch — one of the greatest investors of all time — recommended buying companies that did boring things. He theorized that most stock pickers would naturally gravitate toward more exciting stocks, allowing savvy investors to find no-brainer bargains among the dull and unexciting.
And what’s more dull and unexciting than doing chores? Business services stocks are basically the chore-doers of the economy: Their clients outsource boring work to them. Still, while these jobs may be boring — or even a little bit disgusting — somebody has to do them. And services stocks Cintas (NASDAQ:CTAS), Waste Management (NYSE:WM), and Darling Ingredients (NYSE:DAR) provide essential services that can pay off for investors. Here’s why buying these stocks looks like a no-brainer.
Doing the laundry
Washing clothes may be the quintessential chore, whether you have a machine in your home or have to lug your baskets to the local laundromat. But many businesses don’t want to maintain a machine or devote staff time to laundry, and that’s where uniform renter Cintas comes in.
Cintas rents all kinds of uniforms to businesses as diverse as casinos, garages, and delivery companies. Cintas sends a truck around regularly to pick up the dirty uniforms and drop off clean ones. Cintas has also realized that it can use that regular visit to offer other services like restroom restocking, floor mat cleaning, and first aid kit replenishing for hardly any additional overhead.
Adding those additional services and gobbling up smaller competitors in the fractured uniform rental market has propelled Cintas to huge growth over the last five years, with revenue up more than 50% and net income increasing an astonishing 183.3%. In spite of that, the stock’s P/E ratio is still sitting around 24, about the midpoint of where it’s been the past few years.
Although Cintas — like all business services specialists — is considered to be a cyclical company, it recently upped its guidance for 2019, suggesting that it doesn’t see any major headwinds on the horizon. Cintas seems like a good bet to continue to outperform.
Taking out the trash
Businesses — and people — make a lot of trash, and it all has to go someplace. Not only that, somebody has to take it there. That somebody often ends up being Waste Management, the largest trash hauler and landfill operator in North America.
As the population increases, so does the amount of trash it generates. And since Waste Management also handles recycling, diverting more products from the garbage can to the recycle bin doesn’t have much of effect on the company’s bottom line.
Like Cintas, Waste Management has seen massive growth in net income over the last five years: 1,120% growth on just a 6% increase in revenue! But that’s largely due to a big slump in net income that hit the company in early 2014. Over the last three years, net income has gone up a more modest 68.9% — still impressive for such a large company.
Waste Management doesn’t see things slowing down anytime soon. On the most recent earnings call, CEO Jim Fish opened by telling investors, “At this time last year, I was telling you that 2017 was arguably the best year we’ve seen. I’m pleased to report that 2018 results were even better.” EBITDA grew by more than 5% year over year, and Fish projected similar growth in 2019. About the only downside is that the company’s rapid share price growth has pushed its dividend yield to its lowest point in more than a decade — about 1.9%. But that’s a small price to pay to buy into this amazing growth story.
Cleaning the kitchen
While Cintas and Waste Management have seen incredible growth over the past five years, Darling Ingredients hasn’t kept pace. Darling is a fat renderer and animal products recycler that takes various animal waste materials — used restaurant frying oil and bakery scraps among them; I’ll spare you the others — and turns them into useful components of animal feed, soaps, and other products.
So, yeah, it’s a pretty disgusting business. Lynch would love it: He thought that the only thing better than a boring business was a gross one, to really turn off prospective investors. But recently, Darling has been exploring the use of its animal products in biofuels, through a joint venture with Valero called Diamond Green Diesel.
This biodiesel business has been taking off for Darling — so much so, in fact, that the company has been aggressively expanding its production capacity. In October 2018, Diamond Green Diesel successfully ramped up annual production to 275 million gallons, up from 160 million gallons in 2016. But the company isn’t content to stop there: It’s now planning an additional expansion that will have it producing 675 million gallons per year, with an anticipated completion date in 2021.
In other words, in just five years, Darling will have increased its biofuels production capacity by more than 300%. Even better, the company plans to fund this new expansion with cash from Diamond Green Diesel’s operations. And with Darling’s shares currently trading at about 22 times earnings — on the low end of the company’s historic range — this looks like an excellent time to buy.
Boring is good
Nobody would call business services an exciting sector, but smart investors know that great stocks can be found anywhere. And by looking where others aren’t, you can find some no-brainer bargains. Cintas, Waste Management, and Darling Ingredients all have compelling growth stories that many investors are overlooking. Don’t be one of them.